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A Diamond in the Rubble
By C. WILLIAMS
This metal recycler is hardly scrap, given rising steel demand in emerging markets. In a takeover, it could fetch more than $100 a share.
INVESTORS HAVE DUMPED SHARES OF METAL-RECYCLER Schnitzer Steel Industries onto the scrap heap, spooked by a slide in scrap-metal prices to around $420 a ton from $520 as recently as July. Concerns about slowing growth in emerging markets, chiefly China, the world's biggest steel producer, also have weighed on the company's stock, which has fallen more than 50% in the past two months, to a recent $58.30, retracing nearly all the gains it enjoyed in 2008's first half.
But Schnitzer (ticker: SCHN) isn't junk -- not even close -- notwithstanding the likelihood of continued price volatility in scrap, the main raw material used in steel production by so-called minimill manufacturers. The nation's biggest minimill operator, Nucor (NUE), seeking to secure supplies and reduce its exposure to spot-market fluctuations, bought four scrap-processors this year, and is rumored to be on the prowl for more.
Car Culture
Schnitzer specializes in recycling scrap metal, mostly for use by steel minimills. It also makes steel, and resells auto parts.
Schnitzer, with a market capitalization of only $1.6 billion, and a bargain-basement price/earnings multiple of seven times estimated earnings of $8.19 a share for the fiscal year ending August 2009, represents a compelling long-term bet on a price recovery in scrap, as well as rising steel demand in emerging markets. The Portland, Ore.-based company is expected to report earnings of $200 million, or $6.85 a share, for the fiscal year just ended, on revenue of $3.54 billion.
If the global economy stabilizes in the next year, as many expect, Schnitzer's shares could rebound to the mid-to-high $70s. However, the journey is apt to be choppy.
Brian Culpepper, a manager of the James Small Cap Fund (JASCX), has been a Schnitzer investor for four years, but admits to selling some of his holdings as the stock ran up to an all-time high of 118 in July. Now, it's back on the fund's Buy list. "The company has good overall fundamentals, and the stock is oversold," Culpepper says.
Schnitzer, which exports two-thirds of the scrap it processes, also could make a tempting takeover target, probably at a price north of $100 a share, based on recent industry transactions, which have occurred at six to nine times earnings before interest, taxes, depreciation and amortization, or Ebitda. Industry trends favor continued consolidation "as steel producers look to increase [the] level of backward integration of raw materials," Bob Richard, an analyst at Longbow Research, noted in a report to clients this summer.
Richard thinks Schnitzer could fetch as much as $150 a share in a buyout, or 9.6 times his estimate of fiscal '09 Ebitda of $15.57 a share. He speculates that the company could attract an overseas buyer, likely from Asia or Russia. Schnitzer officials weren't available to comment.
The correction in commodities prices, which began around midyear, has created ample bargains in the steel sector, according to some analysts. Shares of industry giants such as United States Steel (X) and Nucor have fallen sharply, as have those of recyclers such as Sims Group (SMS) and Metalico (MEA).
Davenport & Co. analyst Timothy Hayes favors Schnitzer for investors who want to gain exposure to high scrap and steel prices without taking on the higher earnings volatility associated with traditional steel producers. The company also is a good play on U.S. exports, given its half-dozen shipping facilities on the East and West coasts and in Hawaii. Schnitzer's proximity to deepwater ports allows it to export scrap at lower costs than most of its competitors.
TRACING ITS ROOTS BACK to 1906, Schnitzer today derives 80% of its revenue from recycling ferrous and nonferrous metals. (Ferrous metals contain iron.)
The company also manufactures steel, and sells used auto parts from salvaged vehicles -- businesses that generate ample amounts of cash and could help it post double-digit growth in earnings per share in fiscal '09, despite the probability of lower prices for recycled scrap. Schnitzer and other recyclers expect to compensate for lower prices in part by paying even less for the scrap they process.
Although steel scrap might not retake this year's highs anytime soon, prices are expected to remain lofty relative to lows of around $250 a ton in January, according to data published by American Metal Market.
Table: Metal Benders
Consider the bullish comments of Sims Group, the world's biggest scrap recycler, after the Australian company posted strong fiscal '08 earnings in late August. Management cited several positive pricing trends, including increased scrap purchases by integrated mills, and China's return to the international scrap market after a hiatus. Because of the recent decline in scrap prices, resulting in part from earlier overstocking by steel producers, scrap has become more attractive compared to high-priced iron ore and coal.
FIVE YEARS AGO, SCHNITZER WAS SELLING SCRAP in the U.S. and abroad for just over $100 a ton. In the quarter ended May, the company's ferrous scrap fetched an average of $463 per ton, which contributed mightily to record results for the period.
When it reported results July 1, Schnitzer predicted the good times would roll into the August quarter and beyond. Management saw processing volume increasing by as much as 200,000 tons over the third quarter's 1.13 million tons. For the full fiscal year, Schnitzer expects ferrous volume to have approached the high end of its previously forecast range of 4.4 million to 4.7 million tons.
In the steel-manufacturing business, where Schnitzer produces 750,000 tons of finished products a year, officials predicted prices would jump by 15% to 20% in the fourth quarter versus the third. The auto-parts segment, meanwhile, could continue to benefit from higher selling prices for scrap and cores, or engines, transmissions and alternators. Schnitzer operates 53 auto-parts stores, through which it purchases used and salvaged vehicles. Components are removed and sold to customers, while the remaining car and truck bodies are processed as scrap or sold to other recyclers.
If Schnitzer meets its fourth-quarter guidance, as expected, fiscal '08 net will rise more than 50% from the $131 million, or $4.32 a share, the company earned in fiscal '07. Revenue could jump 36% from a year ago's $2.6 billion. Analysts have reduced estimates for fiscal '09 slightly in recent days, amid the drop in scrap prices, but they still look for gains in net income and revenue, to $236 million and $4.4 billion, respectively.
The Bottom Line
Schnitzer's stock has retraced its first-half gain, and now trades for $58. A stronger global economy could send the shares to the mid-70s; a takeover, to more than $100.
Schnitzer's balance sheet, while not pristine, isn't worrisome either. Net debt increased by $78 million in the latest reported quarter, to $230 million, but the company's net debt-to-capital ratio is a comfortable 21%. Schnitzer pays a dividend of seven cents a share, for a yield of 0.1%.
Executives remain sanguine about the company's outlook. "We evaluate our...performance and the macroeconomic fundamentals supporting our businesses over the long term," President John Carter told analysts during the third-quarter conference call. "We continue to like what we see."
From the vantage point of today's depressed stock price, the view's even better now
By C. WILLIAMS
This metal recycler is hardly scrap, given rising steel demand in emerging markets. In a takeover, it could fetch more than $100 a share.
INVESTORS HAVE DUMPED SHARES OF METAL-RECYCLER Schnitzer Steel Industries onto the scrap heap, spooked by a slide in scrap-metal prices to around $420 a ton from $520 as recently as July. Concerns about slowing growth in emerging markets, chiefly China, the world's biggest steel producer, also have weighed on the company's stock, which has fallen more than 50% in the past two months, to a recent $58.30, retracing nearly all the gains it enjoyed in 2008's first half.
But Schnitzer (ticker: SCHN) isn't junk -- not even close -- notwithstanding the likelihood of continued price volatility in scrap, the main raw material used in steel production by so-called minimill manufacturers. The nation's biggest minimill operator, Nucor (NUE), seeking to secure supplies and reduce its exposure to spot-market fluctuations, bought four scrap-processors this year, and is rumored to be on the prowl for more.
Car Culture
Schnitzer specializes in recycling scrap metal, mostly for use by steel minimills. It also makes steel, and resells auto parts.
Schnitzer, with a market capitalization of only $1.6 billion, and a bargain-basement price/earnings multiple of seven times estimated earnings of $8.19 a share for the fiscal year ending August 2009, represents a compelling long-term bet on a price recovery in scrap, as well as rising steel demand in emerging markets. The Portland, Ore.-based company is expected to report earnings of $200 million, or $6.85 a share, for the fiscal year just ended, on revenue of $3.54 billion.
If the global economy stabilizes in the next year, as many expect, Schnitzer's shares could rebound to the mid-to-high $70s. However, the journey is apt to be choppy.
Brian Culpepper, a manager of the James Small Cap Fund (JASCX), has been a Schnitzer investor for four years, but admits to selling some of his holdings as the stock ran up to an all-time high of 118 in July. Now, it's back on the fund's Buy list. "The company has good overall fundamentals, and the stock is oversold," Culpepper says.
Schnitzer, which exports two-thirds of the scrap it processes, also could make a tempting takeover target, probably at a price north of $100 a share, based on recent industry transactions, which have occurred at six to nine times earnings before interest, taxes, depreciation and amortization, or Ebitda. Industry trends favor continued consolidation "as steel producers look to increase [the] level of backward integration of raw materials," Bob Richard, an analyst at Longbow Research, noted in a report to clients this summer.
Richard thinks Schnitzer could fetch as much as $150 a share in a buyout, or 9.6 times his estimate of fiscal '09 Ebitda of $15.57 a share. He speculates that the company could attract an overseas buyer, likely from Asia or Russia. Schnitzer officials weren't available to comment.
The correction in commodities prices, which began around midyear, has created ample bargains in the steel sector, according to some analysts. Shares of industry giants such as United States Steel (X) and Nucor have fallen sharply, as have those of recyclers such as Sims Group (SMS) and Metalico (MEA).
Davenport & Co. analyst Timothy Hayes favors Schnitzer for investors who want to gain exposure to high scrap and steel prices without taking on the higher earnings volatility associated with traditional steel producers. The company also is a good play on U.S. exports, given its half-dozen shipping facilities on the East and West coasts and in Hawaii. Schnitzer's proximity to deepwater ports allows it to export scrap at lower costs than most of its competitors.
TRACING ITS ROOTS BACK to 1906, Schnitzer today derives 80% of its revenue from recycling ferrous and nonferrous metals. (Ferrous metals contain iron.)
The company also manufactures steel, and sells used auto parts from salvaged vehicles -- businesses that generate ample amounts of cash and could help it post double-digit growth in earnings per share in fiscal '09, despite the probability of lower prices for recycled scrap. Schnitzer and other recyclers expect to compensate for lower prices in part by paying even less for the scrap they process.
Although steel scrap might not retake this year's highs anytime soon, prices are expected to remain lofty relative to lows of around $250 a ton in January, according to data published by American Metal Market.
Table: Metal Benders
Consider the bullish comments of Sims Group, the world's biggest scrap recycler, after the Australian company posted strong fiscal '08 earnings in late August. Management cited several positive pricing trends, including increased scrap purchases by integrated mills, and China's return to the international scrap market after a hiatus. Because of the recent decline in scrap prices, resulting in part from earlier overstocking by steel producers, scrap has become more attractive compared to high-priced iron ore and coal.
FIVE YEARS AGO, SCHNITZER WAS SELLING SCRAP in the U.S. and abroad for just over $100 a ton. In the quarter ended May, the company's ferrous scrap fetched an average of $463 per ton, which contributed mightily to record results for the period.
When it reported results July 1, Schnitzer predicted the good times would roll into the August quarter and beyond. Management saw processing volume increasing by as much as 200,000 tons over the third quarter's 1.13 million tons. For the full fiscal year, Schnitzer expects ferrous volume to have approached the high end of its previously forecast range of 4.4 million to 4.7 million tons.
In the steel-manufacturing business, where Schnitzer produces 750,000 tons of finished products a year, officials predicted prices would jump by 15% to 20% in the fourth quarter versus the third. The auto-parts segment, meanwhile, could continue to benefit from higher selling prices for scrap and cores, or engines, transmissions and alternators. Schnitzer operates 53 auto-parts stores, through which it purchases used and salvaged vehicles. Components are removed and sold to customers, while the remaining car and truck bodies are processed as scrap or sold to other recyclers.
If Schnitzer meets its fourth-quarter guidance, as expected, fiscal '08 net will rise more than 50% from the $131 million, or $4.32 a share, the company earned in fiscal '07. Revenue could jump 36% from a year ago's $2.6 billion. Analysts have reduced estimates for fiscal '09 slightly in recent days, amid the drop in scrap prices, but they still look for gains in net income and revenue, to $236 million and $4.4 billion, respectively.
The Bottom Line
Schnitzer's stock has retraced its first-half gain, and now trades for $58. A stronger global economy could send the shares to the mid-70s; a takeover, to more than $100.
Schnitzer's balance sheet, while not pristine, isn't worrisome either. Net debt increased by $78 million in the latest reported quarter, to $230 million, but the company's net debt-to-capital ratio is a comfortable 21%. Schnitzer pays a dividend of seven cents a share, for a yield of 0.1%.
Executives remain sanguine about the company's outlook. "We evaluate our...performance and the macroeconomic fundamentals supporting our businesses over the long term," President John Carter told analysts during the third-quarter conference call. "We continue to like what we see."
From the vantage point of today's depressed stock price, the view's even better now
I like this play (SCHN), This is a great long term play while the USA economy is slowing down !
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